Silicon Valley Bank Fails After Run on Deposits

 Silicon Valley Bank Fails After Run on Deposits

The Federal Deposit Insurance Corporation took control of the bank’s assets on Friday. The failure raised concerns that other banks could face problems, too.

Silicon Valley Bank’s headquarters in Santa Clara, Calif., on Friday. Founded in 1983, Silicon Valley Bank was a big lender to tech start-ups.

By Emily Flitter and Rob Copeland

Emily Flitter and Rob Copeland cover Wall Street and finance.

March 10, 2023

Updated 9:42 p.m. ET

One of the most prominent lenders in the world of technology start-ups, struggling under the weight of ill-fated decisions and panicked customers, collapsed on Friday, forcing the federal government to step in.

The Federal Deposit Insurance Corporation said on Friday that it would take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, Calif. The bank’s failure is the second-largest in U.S. history, and the largest since the financial crisis of 2008.

The move put nearly $175 billion in customer deposits under the regulator’s control. While the swift downfall of the nation’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately touch off fears of widespread destruction in the financial industry or the global economy.

Silicon Valley Bank’s failure came two days after its emergency moves to handle withdrawal requests and a precipitous decline in the value of its investment holdings shocked Wall Street and depositors, sending its stock careening. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer, a person with knowledge of the negotiations said.

While the woes facing Silicon Valley Bank are unique to it, a financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.

Investors dumped stocks of peers of Silicon Valley Bank, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.

Trading in shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock exchange volatility limits.

By comparison, some of the nation’s largest banks appeared more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo and Citigroup all were generally flat on Friday.

That’s because the biggest banks operate in a vastly different world. Their capital requirements are more stringent and they also have far broader deposit bases than banks like Silicon Valley, which do not attract masses of retail customers. Regulators have also tried to keep the big banks from focusing too heavily in a single area of business, and they have largely stayed away from riskier assets like cryptocurrencies.

Greg Becker, the president and chief executive of Silicon Valley Bank, last year. The bank’s downward spiral accelerated this week.

“I don’t think that this is an issue for the big banks — that’s the good news, they’re diversified,” said Sheila Bair, former chair of the F.D.I.C. Ms. Bair added that since the largest banks were required to hold cash equivalents even against the safest forms of government debt, they should be expected to have plenty of liquidity.

On Friday, Ms. Yellen discussed the issues surrounding Silicon Valley Bank with banking regulators, according to a statement from the Treasury Department.

Representatives from the Federal Reserve and the F.D.I.C. also held a bipartisan briefing for members of Congress organized by Maxine Waters, a Democrat from California and the ranking member of the House Financial Services Committee, according to a person familiar with the matter.

Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank had long been a go-to lender for start-ups and their executives.

Though the bank advertised itself as a “partner for the innovation economy,” some decidedly old-fashioned decisions led to this moment.

Flush with cash from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest, steady returns when interest rates were low.

That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as start-ups and technology companies enjoyed heady profits during the pandemic.

But it bought huge amounts of bonds just before the Federal Reserve began to raise interest rates a little more than a year ago, then failed to make provisions for the possibility that interest rates would rise very quickly. As rates rose, those holdings became less attractive because newer government bonds paid more in interest.

That might not have mattered so long as the bank’s clients didn’t ask for their money back. But because the gusher of start-up funding slowed at the same time as interest rates were rising, the bank’s clients began to withdraw more of their money.

To pay those redemption requests, Silicon Valley Bank sold off some of its investments. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings.

“It’s the classic Jimmy Stewart problem,” said Ms. Bair, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”

Those fears set off investor worries about some of the regional banks. Like Silicon Valley Bank, Signature Bank is also a lender that caters to the start-up community. It’s perhaps best known for its connections to former President Donald J. Trump and his family.

First Republic Bank, a San Francisco-based lender focused on wealth management and private banking services for high net worth clients in the tech industry, warned recently that its ability to earn profits is being hampered by rising interest rates. Its Phoenix-based peer in the wealth management industry, Western Alliance Bank, is facing similar pressures.

Separately, another bank, Silvergate, said on Wednesday that it was shutting down its operations and liquidating after suffering heavy losses from its exposure to the cryptocurrency industry.

A First Republic spokesman responded to a request for comment by sharing a filing the bank made to the Securities and Exchange Commission on Friday stating that its deposit base was “strong and very-well diversified” and that its “liquidity position remains very strong.”

A Western Alliance spokeswoman pointed to a news release by the bank on Friday describing the condition of its balance sheet. “Deposits remain strong,” the statement said. “Asset quality remains excellent.”

Representatives of Signature and Silicon Valley Bank had no comment. Representatives for the Federal Reserve and F.D.I.C. declined to comment.

Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.

In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.

At the end of 2016, Silicon Valley Bank’s asset size was $45 billion. It had jumped to more than $115 billion by the end of 2020.

Friday’s upheaval raised uncomfortable parallels to the 2008 financial crisis. Although it’s not uncommon for small banks to fail, the last time a bank of this magnitude unraveled was in 2008, when the F.D.I.C. took over Washington Mutual.

The F.D.I.C. rarely takes over banks when the markets are open, preferring to put a failing institution into receivership on a Friday after business has closed for the weekend. But the banking regulator put out a news release in the first few hours of trading on Friday, saying that it created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one.

The regulator said that the new entity would be operating by Monday and that checks issued by the old bank would continue to clear. While customers with deposits of up to $250,000 — the maximum covered by F.D.I.C. insurance — will be made whole, there’s no guarantee that depositors with larger amounts in their accounts will get all of their money back.

Those customers will be given certificates for their uninsured funds, meaning they would be among the first in line to be paid back with funds recovered while the F.D.I.C. holds Silicon Valley Bank in receivership — although they might not get all of their money back.

When the California bank IndyMac failed in July 2008, it, like Silicon Valley Bank, did not have an immediate buyer. The F.D.I.C. held IndyMac in receivership until March 2009, and large depositors eventually only received 50 percent of their uninsured funds back. When Washington Mutual was bought by JPMorgan Chase, account holders were made whole.

Emily Flitter covers finance. She is the author of “The White Wall: How Big Finance Bankrupts Black America.” @FlitterOnFraud

Rob Copeland covers Wall Street and banking. @realrobcopeland

https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html

Growth Stocks

How to select growth stocks?

Selecting growth stocks can be a challenging task, but there are a few key factors to consider when evaluating potential investments. Here are a few strategies that may help you identify growth stocks:

Look for companies with strong revenue and earnings growth: Companies that have consistently grown their revenues and earnings over time are more likely to continue growing in the future. Look for companies with strong revenue and earnings growth rates, and compare them to industry averages.

Look for companies with a competitive advantage: Companies that have a sustainable competitive advantage, such as a strong brand, proprietary technology, or a large market share, are more likely to continue growing in the future.

Look for companies with a solid management team: A strong management team is essential for a company's long-term growth. Look for companies with a track record of success and a clear vision for the future.

Look for companies in growing industries: Companies that operate in growing industries, such as technology, healthcare, or renewable energy, are more likely to benefit from long-term growth trends in those industries.

Look at valuation metrics: Growth stocks tend to trade at higher valuations than value stocks, so it's important to consider a company's price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and other valuation metrics to ensure that you are getting a good deal.

Do your own research: It's important to conduct thorough research on the companies you are considering investing in. Look at their financial statements, management team, and industry trends to identify companies with strong fundamentals and growth potential.

It's worth noting that past performance is not a guarantee of future results and that investing in the stock market carries risk. It's always good to do your own research, invest in a diverse set of assets, and have a well-defined investment strategy that aligns with your financial goals.

What are the risks of investing in growth stocks?

Investing in growth stocks can be a great way to achieve strong returns, but it also comes with certain risks. Here are a few of the risks to consider when investing in growth stocks:

High Valuation Risk: Growth stocks tend to trade at higher valuations than value stocks, so there's a risk that the stock's price may not be justified by the company's fundamentals. High valuation can lead to a stock to be overpriced and may result in disappointment in future returns.

Earnings Risk: Growth stocks often have high expectations for earnings growth, which means that if a company misses its earnings estimates, its stock price may drop. This can be especially true for companies that have high P/E ratios.

Industry Risk: Companies that operate in a specific industry are subject to the risks of that industry. For example, companies in the technology sector are subject to rapid technological change, while companies in the healthcare sector may be subject to changes in government regulations.

Interest rate Risk: Growth stocks are sensitive to changes in interest rates, as they are more reliant on future earnings than current dividends. When interest rates rise, the value of future earnings may decrease, causing the stock price to fall.

Concentration Risk: Investing in a small number of growth stocks can lead to concentration risk, which means that if one of the stocks in your portfolio performs poorly, it can have a significant impact on your overall returns.

Political and Economic Risk: Political and economic events such as war, natural disasters, and changes in government policies can also impact a growth stock's performance.

It's important to keep in mind that investing in growth stocks carries a higher level of risk than investing in value stocks. It's important to diversify your portfolio, do your own research and have a well-defined investment strategy that aligns with your financial goals and risk tolerance.

Where to find value stocks?

Value stocks can be found in a variety of places, but here are a few strategies to help you identify potential investments:

Financial Statements: Look for companies that have strong financials, such as a low price-to-earnings (P/E) ratio and a high return on equity (ROE). These companies may be undervalued by the market and have the potential for strong returns.

Dividend Yielding Stocks: Companies that pay dividends tend to be more established and financially stable, and can be a good source of income. Dividend-paying companies are often considered as value stocks.

Out-of-Favor Industries: Look for companies that operate in out-of-favor industries, such as retail or energy. These companies may be undervalued by the market due to negative industry trends, but may have strong fundamentals and the potential for a turnaround.

Screening tools: There are various screening tools available online, such as Finviz, that can help you filter stocks by various fundamental and technical criteria, such as P/E ratio, ROE, dividend yield, and more.

Research: Do your own research by reading financial statements, analyst reports, and other financial publications to identify companies that may be undervalued by the market.

Professional guidance: Consider seeking the guidance of a professional financial advisor or money manager who specializes in value investing and can help you identify potential investments based on your investment goals and risk tolerance.

It's worth noting that past performance is not a guarantee of future results and that investing in the stock market carries risk. It's always good to do your own research, invest in a diverse set of assets, and have a well-defined investment strategy that aligns with your financial goals and risk tolerance.

Property Developers - Rising Interest Rates and Costs Add to Woes

Kenanga Research & Investment

Property Developers - Rising Interest Rates and Costs Add to Woes

kiasutrader

Publish date: Fri, 13 Jan 2023, 09:08 AM

We maintain NEUTRAL on the sector as it continues to be weighed down by oversupply and cautious lending by the banks, while housing affordability is eroding on the back of rising interest rates and soaring construction cost, not to mention the already high household debt to GDP ratio in Malaysia. Our key concerns going into 2023 are developers’ elevated net debt levels and tight cashflows, exacerbated by higher interest rates. Our top sector picks are developers with strong sales despite the tough operating environment, translating to cash flows that anchor good dividends, namely, ECOWLD (OP; TP: RM0.83) and IOIPG (OP; TP: RM1.60).

Not out of the woods. We expect operating environment for developers to remain challenging in 2023. We foresee unfavourable industry trends during much of 2022 to persist into 2023. These include: 

(i) soft prices as reflected in a weak house price index as seen in a QoQ contraction in 3Q2022 despite the rising construction and land costs, and 

(ii) the still elevated household debt to GDP ratio at 85% in 1H2022.

While the loan approval rate for 10M2022 already recovered back to pre-pandemic levels of 43%, it is still pale in comparison to 45-51% seen during the upcycle in 2011-2014. Meanwhile, housing affordability is eroding on the back of rising interest rates and soaring construction cost. Property developers are struggling to pass on higher construction cost to end-buyers as price hikes will hurt take-up, putting the viability of the new launches at risk. Most of them choose to sacrifice on margins.

Overhang eases but remains high. Based on NAPIC’s latest 3Q2022 publication, there was some reduction in units in circulation (which includes overhang and unsold under construction units) against the peak recorded in 2021. Despite the reprieve, we note that there is still a long way towards recovery as units in circulation are still rather high versus historical levels – creating price competition and pressure for new unit launches.

A bright spot in landed homes. Since the onset of the pandemic, we note that prices for terrace homes were the only sub-segment that have shown notable growth while prices of high-rises and detached homes have either declined or only grew marginally. Taking cue from such trend, we believe developers focusing on landed townships, i.e. ECOWLD, IOIPG, and SIMEPROP (OP; TP: RM0.55) will fare better than the rest.

Balance sheet concerns linger. Going into 2023, we grow increasingly cautious over developers’ high borrowings levels which would translate to higher financing costs and potential liquidity crunch. Already faced with a tough operating climate, developers’ earnings will be hurt further by the high financial leverage. Developers under our coverage have all shown increased net debt levels over the pandemic, with the exception of ECOWLD and UOADEV (MP; TP: RM1.75).

Overall, we reiterate our top picks being developers with strong cash flows that could anchor good dividends, namely, ECOWLD and IOIPG. We like ECOWLD for its strong branding and prudent cashflow management while IOIPG is for its hidden value within in its prime investment properties in the Klang Valley, Singapore and China, which could potentially be unlocked via a REIT.

Source: Kenanga Research - 13 Jan 2023

https://klse.i3investor.com/web/blog/detail/kenangaresearch/2023-01-13-story-h-301086692-Property_Developers_Rising_Interest_Rates_and_Costs_Add_to_Woes

How a RM 6 bil company falls into liquidation

 

Serba Dinamik seeking legal advice over winding-up order

https://www.theedgemarkets.com/node/651239

Insider purchases

Insider purchases and sales are noteworthy milestones but no road map to investing success.

You're building a mosaic to decide whether you want to be invested in a company, this is just one piece of the puzzle.

But be careful before you follow in a CEO's footsteps. Knowing how much stock to put into an insider's actions, literally and figuratively, is a tricky business.

The most important aspect that the lay investor should keep in mind is that it is a first screen. Despite that caveat, though, "it's the best one that I know of".

When you see an executive put large sums of money on the line, clearly that's a signal that he feels very confident, but that doesn't necessarily mean that the stock's going to go up.

Some insider buying maybe just simply window dressing or a statement to investors.

It's possible that smaller purchases could be aimed largely at drumming up more buying.

They may hope that the publicity of their having bought will have a positive effect on the direction of the market price.

UK credit card rates reach record in new blow to consumers. Average annual percentage rate for the products is now 30.4%.

Publish date: Tue, 10 Jan 2023

UK shoppers taking out new credit cards face record-high interest rates on their bills.

The average annual percentage rate for the products is now 30.4%, according to Moneyfacts Group Plc, which began compiling the data in June 2006. That includes fees and is up from 26% a year ago.

Shoppers in Britain are putting more money on their credit cards as the highest inflation in 40 years erodes savings built up during the pandemic. They splurged on their cards before Christmas, spending £1.2 billion in November, triple the amount of the previous month.

Holiday spending has so far helped retailers surprise to the upside in earnings, with shoppers paying out more than £12 billion on groceries alone for the festivities.

That expenditure was driven in part by food inflation, which has contributed to a cost of living crisis that’s expected to leave families £2,100 worse off.

As well as increasing rates, credit card providers have been making their terms less attractive on average. Over the past 12 months, balance transfer fees have risen and the interest-free balance transfer term has shrunk, the Moneyfacts data show.

  - Bloomberg

Over 800,000 UK households to see mortgage rates double in 2023

Publish date: Tue, 10 Jan 2023

Over 800,000 UK households will see their mortgage rates more than double this year as they come off low fixed-rate deals, adding to the pressure on living standards.

In total, more than 1.4 million fixed-rate borrowers will have to renew their mortgage in 2023, with 57% currently on deals of less than 2%, according to an Office for National Statistics (ONS) analysis of Bank of England (BOE) data. The average variable rate mortgage is currently 4.41% and fixed-rate deals start at around 5%.

A typical fixed-rate mortgagor faces a £250 increase in their monthly payments if their deal expires this year. The hit will squeeze incomes further for those already reeling from soaring prices of energy and other goods.

Including households on variable deals, a total of four million UK homeowners are exposed to rate rises this year, the BOE said in December.

Banks and building societies have raised their mortgage offers because the BOE raised interest rates from 0.1% in December 2021 to 3.5% last month to tame double-digit inflation. Rates are expected to reach between 4% and 4.5% this year.

The ONS warned that the living-standard squeeze may be even harder for private tenants as rents are currently rising at 4%, the fastest pace since records began in 2016 as landlords pass on higher mortgage costs.

Private renters spend on average £106.50 a week on rent, compared with £140.80 for mortgage holders. However, as homeowners tend to be wealthier, the sums amount to 24% of weekly spending for renters and just 16% for mortgagors. For low-income renters, housing accounts for 30% of spending, the ONS added.

The ONS’s opinions and lifestyle survey found that both renters and mortgage borrowers are finding their housing costs “increasingly difficult to service”.

Landlords are particularly exposed to rising rates because the majority are on interest-only deals. More than a third of deals expire in the next two years, at which point landlords will have to choose between increasing rents to cover their costs or selling.

 

  - Bloomberg

Additional notes:

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security) 

Principal-only mortgage security (PO)—principal payments stripped from a pool of mortgages which, in response to changes in interest rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility 

Profits of Malaysian plantation companies are heavily influenced by external factors

December 30, 2022 

CPO expected to average at RM5,100 a tonne in 2022, seen at RM3,800 a tonne in 2023, says MPOB

KUALA LUMPUR (Dec 30): The Malaysian Palm Oil Board (MPOB) expects the price of crude palm oil (CPO) to average at RM5,100 a tonne in 2022, which is 15.7% higher compared to RM4,407 a tonne in 2021.

The government agency also foresees the price of CPO to stabilise at an average of RM3,800 a tonne in 2023 in anticipation of 

• higher palm oil production, 
• improved weather conditions in the second half of 2023 and 
• higher availability of supply of other major vegetable oils.

MPOB director general Datuk Dr Ahmad Parveez Ghulam Kadir said soybean oil prices, which are expected to be low due to the higher production in Brazil and the US, may impact the price of CPO.

He said in a statement on Friday (Dec 30) that the strengthening of the ringgit against the US dollar may also affect the price of CPO.

According to MPOB, the average CPO price for January to November 2022 was RM5,167 a tonne, up 18.4% compared to RM4,363 a tonne for the same period in 2021.

It said CPO prices had experienced a decline beginning the third quarter of 2022 due to the 

• high CPO production season, 
• rising palm oil stocks and 
• declining soybean oil prices.

Palm oil industry saw higher production, exports and revenue in 2022

MPOB expected the closing stocks of palm oil in 2022 to be at 1.85 million tonnes, up 14.9% compared to 1.61 million tonnes in December 2021 due to higher production.

Parveez said closing stocks of palm oil are projected at two million tonnes in 2023, higher than that in 2022, due to the expected higher supplies of other major vegetable oils including palm oil.

According to MPOB, CPO production for January to November 2022 stood at 16.83 million tonnes, an increase of 1% compared to 16.67 million tonnes achieved in the same period of 2021.

“This was attributed to an increase of 2.8% in processed fresh fruit bunches (FFBs) to 86.51 million tonnes in January to November 2022 compared to 84.17 million tonnes in the same period last year,” MPOB said.

Parveez said that CPO production is expected to increase slightly by 2.1% to 18.5 million tonnes in 2022 as compared to 18.12 million tonnes in 2021. He said the slow recovery is expected due to the issue of labour shortage in oil palm plantations' FFB harvesting and unloading activities.

Parveez projected CPO production to further increase to 19 million tonnes for 2023 due to the expected increase in the productive areas, especially in Peninsular Malaysia and Sarawak. He added that the workforce situation may stabilise next year as foreign worker applications are being approved in stages.

MPOB also provided data that the exports of palm oil and other palm-based products for January to November 2022 increased by 1.3% to 22.43 million tonnes compared to 22.14 million tonnes in the same period of 2021.

It said the higher price of palm oil in January to November 2022 has boosted total export revenue by 31.8% to RM120.43 billion from RM91.38 billion in January to November 2021.

Exports of palm oil alone itself rose slightly by 0.8% to 14.25 million tonnes in January to November 2022 compared to 14.14 million tonnes in the previous corresponding period, MPOB said.

“As such, palm oil export revenue surged 31% to RM80.22 billion from RM61.26 billion in the same period of 2021,” MPOB said.

Parveez said that Malaysia’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on Sept 30, 2022 will encourage demand for palm oil products as it broadens the country’s access to new markets such as Canada, Mexico and Peru, which are not covered by any existing free trade agreement.

“Based on cost benefit analysis on the potential impacts of the CPTPP, upon ratification and implementation of the CPTPP, tariffs for palm oil products are now reduced from a maximum of 6% for Canada, 5% for Mexico and 9% for Peru to lower tariffs based on the tariff elimination schedule,” he said.

“Apart from higher palm oil exports to the markets, the elimination of tariffs improves the Malaysian palm oil competitiveness in the CPTPP member countries.”

https://www.theedgemarkets.com/node/650017

Hailey Chung

theedgemarkets.com

Surin Murugiah

Conclusion:

Profits of plantation companies are affected by crude palm oil (commodity) prices which are heavily influenced by many external factors:

- seasonal fluctuation on palm oil production,
- weather conditions
- availability of supply of other major vegetable oils e.g. soya
- labour supply in oil palm plantations' FFB harvesting and unloading activities.
- strength of the ringgit
- increase in the oil palm productive areas
- tariffs for palm oil products

Structural problems impeding our Malaysian stock market

Malaysian stocks not performing because of serious structural impediments.

-  Increasingly market-dominating government linked companies and government-linked investment companies - with explicit and/or implicit unfair advantages - led to the crowding-out of the private sector.

-  The lower number of banks - after rounds of consolidation - resulted in less diversity in terms of lending strategies, practices and appetite for risks.

- Falling corporate profits and other factors, translated into chronic underinvestment in productive assets, technology, R&D and innovation.

- The quality of the local education system has been in a long-term decline.

-  Companies that relied heavily on cheap, low-skilled foreign labour and failed to move up the value chain were, increasingly, faced with pricing pressure from digitalisation and technology disruption.

- Those that has in the past flourished under government subsidies were by and large unable to fully pass on rising costs, leading to a narrowing of margins.  Unfortunately, many Malaysian companies remain simply rent-seekers.

-  The issue of corporate governance may be another reason.  If controlling shareholders can pay themselves half of the company's profit as annual compensation, which represents 4% to %% of the market capitalisation with no dividend paid to shareholders, surely it must be clear that this amounts to a blatant transfer of wealth of a public company to its controlling shareholders.

Summary

The above are some of the more obvious reasons for the chronic underperformance, in terms of corporate earnings and the stock market.  

They must be addressed urgently and within a holistic framework if we want to see a sustainable turnaround.

But despite all the gloom, investors can still profit by investing wisely and rationally.

Reference:  Tong's Portfolio Investing can be fun and profitable

Why had the Malaysian stock market done so badly from 2014 to 2018?

In June 2019, the FBM KLCI had fallen in four of the last five years (2014 to 2018).  Why had the Malaysian stock market done so badly?

One of the biggest reasons had to be underlying earnings, which were the main driver of stock prices over the longer term.

Period of 5 years (2014 to 2018)

855 companies were categorised into their respective sectors 

-  To determine the profit trend and the compound annual growth rates (CAGRs) for each sector.  

-  The sector net margin for each year was also tabulated.

Findings:

Total net profit for all companies fell in 2015, 2016 and 2018 - the CAGR of the decline was 6.8%.  

Net profit margin too had contracted sharply over those five years, from an average of 11.3% in 2014 to 7.7% in 2018.

The years in which total net profit fell were also the years in which the FBM KLCI and broader-based FBM EMAS Index ended in the red.

Share prices and P/E valuations

Notably, the share prices declined but the size of the drop was lower than that for earnings.  

The result was the price-to-earnings valuations were higher in 2018 than they were in 2014.  

And this was why the stock market was underperforming - valuations were not attractive even though share prices were lower.

It also meant a turnaround was unlikely until there is a broad-based earnings recovery.

Sector Analysis (2014 to 2018)

Energy (oil and gas) sector fared the worst in terms of profits, given the sharp fall in crude oil prices and resulting collapse in global exploration and production activities.  Brent crude fell from US$110 a barrel at its 2014 peak to below US30 during the lows in 2016.  Oil prices were hovering around US $60 a barrel in 2018.

Plantation companies' profits too were affected by commodity prices falling 15.6% annually, on average, since 2014.  Crude palm oil fell from an average price of RM 2,400 a tonne in 2014 to RM 2,170 a tonne in 2015.  CPO prices recovered to RM 2,630 and RM 2,800 in 2016 and 2017 respectively before dropping back to RM 2,240 a tonne in 2018.

Construction, consumer products and services, properties, transport and logistics, utilities, telecommunications and media and even real estate investment trusts reported negative profit growth between 2014 and 2018.

Healthcare (15 companies)  was the best performing sector with a CAGR of 5.7% in their profits.

Financial services (34 companies) grew at a CAGR of 4.3% in their profits.

Technology (81 companies) expanded just 2% in their profits.

Industrial products and services (239 companies) is the biggest sector by number of companies and its profits were up only 0.4% a year.

Consumer products and services (183 companies), their profits fell 2.3% annually on average.

Property companies' profits declined at an average of 3.1% annually for the past four years.

Summary:

The energy and plantation sectors are heavily influence by external factors.

Overall, the average Malaysian company had not fared well at all from 2014 to 2018.  

Net profit margin for all sectors declined throughout the five-year period from 2014 to 2018.

Underlying earnings were the main driver of stock prices over the longer term.

Is the yield curve inversion a signal to sell stocks?

Even if a yield curve inversion does precede recession, it can neither predict the timing, length nor depth of the recession - and, crucially, how stock markets react.

Historically, inversions have happened between six months and two years before a recession - during which stocks have traded flattish, up and down.

All this just means that trying to predict stock market movements is a fool's errand.  Narratives, it seems, do not move stock prices.  Rather, reasons are provided for stock movements, after the facts.

As value investors, we would be much better off looking at the underlying business, earnings, cash flows and balance sheet instead of trying to time the market.

In reality, most recessions are triggered by exogenous events - such as geopolitics, war, trade conflicts and asset bubbles - that are inherently unpredictable.

Additional notes:

Yields on the long-dated bonds are typically higher than those for shorter-duration ones, owing to the additional term premium - to compensate for inflation over the duration.

The difference in yields between the two- and 10-year bonds  is the most popular market yardstick for Treasury yield spread.

When this gap turns negative, we deem the yield curve as inverted.  

But a bear market isn't all bad news.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. 

In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. 

By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.

Necessary Bears

Bear markets perform the necessary service of deflating values and sweeping the market clean of stocks that are weak and riding on fads alone. 

Your faith in solid fundamentals will usually pay off over time, but even a great company’s stock can get banged around in a tough market. 

The lesson here is that stocks, as illustrated by the Dow, are good long-term investments, but dangerous short-term bets.

Actions in an overvalued market

 When markets are overvalued, Graham recommends the following actions:

1)      Do not borrow to buy or hold securities. 

2)      Do not increase the proportion of stocks held in funds.

3)      Reduce common stock holdings to no more than 50% of the overall portfolio.

4)      Suspend contributions to any “dollar-cost averaging” stock contribution plan.       

Inflation and the Defensive Investor

Fixed income investments fare worse during inflationary periods than do common stocks.  During inflationary periods, firms can increase prices, profits, and dividends causing their share price to increase and offsetting declines in purchasing power. 

There is no underlying connection between inflation and the movement of common stock earnings and prices.  Appreciation does not result from inflation, but rather from the re-investment of profits.  The only way for inflation to increase common stock values is to raise the rate of earnings on capital investment, which it has not done historically.

Economic prosperity usually is accompanied by slight inflation, which does not affect returns.  Offsetting factors include rising wage rates that exceed productivity gains and additional capital needs that cause interest rates to increase.  

Graham describes alternatives to common stocks as a hedge against inflation.  These alternatives range from gold and diamonds to rare paintings, stamps, and coins.  Gold has performed poorly, far worse than returns from savings in a bank account.  The latter categories, such as paying thousands of dollars for a rare coin, can not qualify as an “investment operation.”  Real Estate is still another alternative; however, its value fluctuates widely, and serious errors may be made when purchasing individual locations.  

Again, the defensive investor is best served by purchasing a portfolio of carefully chosen common stocks and bonds.

Ref:  Intelligent Investor by Benjamin Graham

Investment Mistakes in a Bear Market

Successful investing is not magic, just keep things simple and maybe follow few investing and money rules of thumb and you’ll be fine in the long run.

Investment Mistakes in a Bear Market

1.  Selling without any logical reasoning or attention to long-term goals.  Often they all miss the fact that they are selling at the bottom to only repurchase them back at the top. Stop selling without a reason, only sell if the fundamentals have changed for the long term or the investment does not fit in your plan, not because everyone else is selling in the market.

2.  The only worse thing one can do than selling out in a bear market is stop investing during the bear market.  Would you stop shopping if retail prices dropped 30%? No.   When you stop investing during a bear market you will miss out on many undervalued investment opportunities which can have great returns in the long run.

3.  Some investors start to look at alternative investments, (e.g. gold) because they believe somehow these will perform better than the equity markets.  Although alternative investments have their place in a portfolio the excessive focus during bear markets makes them dangerous.

4.  Just stop wasting your time and money trying to time the markets. Investors are more likely to time the markets during a bear market, as there are often big swings, which are seen as opportunities by investors, this strategy will only hurt your portfolio.

I know bear markets hurt, but you trying to “improve” things will only make things worse.  

• What were your investment mistakes during this bear market? 
• What have you learned from them?  
• Do you know anyone who made these mistakes?

To win in the stock market over the long haul, be willing to lose over the short-term

In the short-term, market downturns feel like they will never end. 

In the long-term, all corrections look like buying opportunities.

Regardless of how long this correction lasts, to win in the stock market over the long haul you must be willing to lose over the short-term." -Ben Carlson (emphasis added)

Bear-Market Rally or New Bull?

How do investors tell the difference between a bear-market rally and the birth of a new bull market? .

Investment professionals look for certain technical signals to be in place before confirming a reversal is underway. What’s key is the number of stocks participating in a move, which is why these sorts of indicators are referred to in the parlance of market technicians as “breadth thrust” signals. The duration of the move and the price gains associated with it are also important. 

The indicators that most reliably confirm that there is a shift into a new bull market are:

• On the New York Stock Exchange, the NYSE American, and Nasdaq, 90% of the common stocks trade above their 10-day moving averages.
• Stocks advancing on the NYSE outpace those declining by nearly a 2-to-1 margin for at least 10 days.
• More than 55% of the stocks on the NYSE set new highs over a 20-day period.

These events only happen at bullish turns, says NDR’s Clissold. He highlights the end of the pandemic-induced bear market in March 2020, the shortest in history. That lasted 33 or 40 days, depending on whether you’re looking at the S&P 500 or the Dow Jones Industrial Average, where there were a series of powerful rallies that occurred through March and early April signaling a new upward move.

Faced with the worst first half for stocks and bonds in 50 years, the highest inflation in 40 years, and an endless barrage of bad economic data, investors might be excused for searching for bargains amid the rubble and assuming most of the damage is done.

Wall Street pros are at odds as to whether we are at an inflection point in the markets. Some see indications that we have likely hit the lows for stocks, while others warn of more pain ahead.

Representing the more bullish camp is James Paulsen, chief investment strategist at Leuthold Group in Minneapolis. He notes that the bottom may have already been made as the Fed is nearing the end of its tightening cycle, growth is slowing, and inflation is beginning to roll over. Moreover, he believes most of “the sellers are long gone.”

“Are there any nervous Nellies left?” he asks.  

Taking the opposite view is David Kotok, co-founder and chief investment officer of Cumberland Advisors, a registered investment advisory firm in Sarasota, Florida, with $3.5 billion under management.

“We haven’t reached extreme levels of fear yet,” Kotok says. “We haven’t made a bottom because we haven’t seen extreme selling.” He expects interest rates will continue to go higher as inflation proves harder to subdue, geopolitical tensions worsen, and “shocks” emerge. He’s also concerned about “contagion risk” emanating from slowdowns in global economies

https://www.morningstar.com/articles/1105388/how-do-you-tell-a-bear-market-rally-in-stocks-from-a-new-bull-run

The three bears scenario: how the bear market plays out if a recession occurs in 2022, 2023 or not at all.

In its “three bears” scenario, NDR lays out possibilities for how the bear market plays out if a recession occurs this year, next year, or not at all.

1.  If a recession occurs sometime in the second half of 2022, the stock market could drop another 10% or more. Bear markets that coincide with recessions tend to decline nearly 35% on average and last for 15.3 months. If this were to be the case, the sooner it would start, the sooner it would be over given that a bear market bottoms four months before a recession, setting the stage for a “shorter than average” recessionary bear market.

2.  If a recession occurs in 2023 that would make the current bear market twice as long as average, and likely lead to numerous bear-market rallies that eventually fail as they have in past instances. Clissold cites 1973, 1978, and 2000 as past bear markets that saw numerous rallies between their start and finish with a maximum gain of 15.9%, 14.3%, and 15.5%, respectively.

3.  The last and best scenario is if there is no recession at all. Stocks decline on average by 25% in a non-recessionary bear market over 9.1 months. In the past 50 years, the average decline has been 18% over 6.8 months.

If the Fed can achieve the delicate balance of taming inflation by slowing the economy without tipping the country into a recession, Clissold says, “the cyclical bear is likely close to being over.”

NDR = Ned Davis Research, an independent provider of global investment research based in Nokomis, Florida

How Do You Tell a Bear-Market Rally in Stocks From a New Bull Run? | Morningstar